Ascendas REIT - DBS Research 2017-07-28: The Chanel Bag Of REITs

Ascendas REIT - The Chanel Bag Of REITs

Pricing in S$200m in acquisitions; low gearing to prompt manager to actively manage its leverage

BUY call maintained with higher TP of S$2.85.

What’s New

Ascendas REIT (A-REIT) is like a “Chanel Bag” among Singapore’s REITs.

Priced at a premium but still desirable to many. 1QFY18F DPU of 4.05 scts (4.3% y-o-y) is commendable, thanks to its diversified and sizeable portfolio.

One of the few REITs that offer strong earnings visibility, as well as ability and propensity to acquire assertively. Maintain BUY!

Summary: 1Q17 DPU of 4.05 Scts slightly ahead.

Ascendas REIT (A-REIT) reported a good set of results, posting growth of 4.3% in 1Q18 DPU to 4.049 scts, which represents close to 25% of our forecasts.

Gross revenues and net property income increased by 2.7% and 2.6% y-o-y to S$213.3m and S$153.4m, respectively. This was mainly driven by the contributions from acquisitions completed in the last financial year – DNV/DSO (Feb’17) and 3 properties in Australia. These properties more than compensate for the loss of income contribution from the sale of its 2 properties in China as well as the decommissioning of 50 Kallang Avenue for asset enhancement works.

Distributable income is up 10.9% at S$118.5m, which includes a tax adjustment of close to S$5.9m from the previous year; stripping that out, distributable income would have increased a more modest 6%, which is commendable in itself.

Operational performance remains strong

Portfolio occupancy remained stable at 91.6%, which is a marginal improvement y-o-y and q-o-q.

Singapore: In Singapore, A-REIT’s “same store” occupancy rate was at 88.8% and 85.5% for its multi-tenanted buildings (MTB), 0.6ppt and 0.3ppt higher than a quarter ago. Rental reversions were a positive 1.1%, with Business Park (+3.7%) and Integrated facilities (13.3%) reporting strong results while the leases for its HiSpecs (-0.7%), Light Industrial (-4.0%) and Logistics (- 2.0%) remained weak due to pressures from excessive supply in the industrial space in Singapore.

Australia: Its Australian portfolio was substantially full with long leases (weighted average lease expiry of 5.5 years), implying strong earnings visibility. Rental reversions for leases that expired was a positive 3.5%.

Outlook

Looking ahead, while we see dissipating supply risk in the industrial sector, we expect rental reversions to remain mixed, and at best flat, for close to 12% of its income expiring in the rest of FY18F.

We note that expiring rents across its Singapore portfolio are either at/above market transaction levels, implying that organic growth will continue to remain modest.

Rental escalations from its Australian portfolio (c.3.0%) will continue to offer stable growth in distributions in the medium term.

Pricing in acquisitions, raising TP of S$2.85/unit.

Acquisitions will be a key driver of growth and we believe that A-REIT, trading at an implied cap rate of 5.6%, can deliver value-accretive acquisitions to drive DPU growth in the future.

Supporting the REIT’s inorganic growth ambitions will be a lowly-geared balance sheet of 33.6%. while an equity issuance at current levels could help support more meaningful deals.

Our TP is raised to S$2.85/unit. Maintain BUY, given a total return of 11%.

Where we differ.

Conservative estimates but see upside bias if acquisitions are executed upon.

1Q18 DPU remains strong and momentum could surprise, and given the REIT’s leading operational scale in Singapore and its focus on the business park space (37% of earnings), we believe that it is in a strong position to deliver stable returns. In fact, we see ample opportunities that the Manager can deliver earnings surprise on the back of

the REIT’s ability to re-let close to 12% of vacant space in its portfolio, and

acquisitions which the street has not priced in.

Gearing up to acquire; potential fund raising to strengthen the balance sheet.

The Manager remains on the lookout for acquisitions in Singapore and Australia to complement a fairly flattish rental outlook.

While A-REIT’s low gearing of c.35% offers ample headroom, the strong share price performance (implied yield of c.5.9%) means that new equity could also be issued to fund any meaningful acquisition opportunities.

Key Risks to Our View

Interest-rate risk. An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.80% of its interest cost hedged with fixed rates.

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